Monday, 17 August 2026
The European Central Bank (ECB) has concluded that euro area banks generally demonstrated a sound understanding of how geopolitical events could affect their businesses, but identified significant weaknesses in stress-testing frameworks that supervisors expect institutions to address over the coming years.
The findings were published following the ECB’s 2026 geopolitical reverse stress test, which assessed 110 banks under its direct supervision. Unlike traditional stress tests that measure banks’ resilience against a predefined economic scenario, this exercise required each institution to work backwards from a specified outcome, designing a geopolitical scenario capable of reducing its Common Equity Tier 1 (CET1) capital ratio by at least 300 basis points. The objective was to evaluate banks’ scenario design and risk modelling capabilities rather than their capital strength.
The exercise forms part of the ECB’s supervisory priorities for 2026–2028, reflecting the growing importance of geopolitical developments as a source of financial and operational risk for Europe’s banking sector. While the ECB concluded that most banks were able to develop credible, institution-specific scenarios, it also found several shortcomings that will form part of future supervisory discussions.
Among the most significant findings was the limited ability of many banks to capture the interaction between solvency and liquidity during periods of severe stress. According to the ECB, many institutions continue to assess capital and liquidity pressures separately, despite evidence from previous financial crises that both risks can reinforce each other during periods of market disruption. The central bank identified this solvency-liquidity relationship as one of the most important areas requiring improvement.
The scenarios developed by participating banks reflected a broad range of geopolitical risks. Frequently cited events included military conflicts, disruptions to global supply chains, energy shortages, economic sanctions, political instability and cyberattacks. Around one quarter of institutions specifically referred to conflict in the Middle East, including potential disruption to shipping through the Strait of Hormuz, while further escalation of the war in Ukraine and tensions involving China, Taiwan and the United States also featured prominently. The ECB emphasised, however, that these scenarios were intended to represent the most material risks for individual banks rather than forecasts of the most likely future events.
The review found that projected losses were largely driven by deterioration in the real economy, with sectors such as agriculture, construction, manufacturing, transport and hospitality expected to experience the greatest pressure under many scenarios. For banks with significant trading operations, lower fee income and weaker trading revenues were also identified as important transmission channels. Although liquidity positions generally remained above regulatory minimums, foreign currency liquidity proved more vulnerable, with some institutions projecting liquidity coverage ratios below 100 percent.
Cyber risk also emerged as a major concern. Eighty-six of the 110 banks identified cyberattacks as a significant disruption within their scenarios, while 57 institutions considered cyber incidents to be their primary geopolitical threat. Third-party service disruptions were the second most frequently identified operational risk. Although these risks were not included in the capital depletion target, the ECB said they should become an integral part of banks’ broader risk management and stress-testing frameworks.
The ECB also expressed concern that some institutions relied on overly optimistic assumptions regarding balance sheet growth or mitigating actions during a systemic crisis. Planned responses such as capital raising, asset disposals, cost reductions or portfolio restructuring may be individually realistic, but the ECB noted that many banks assumed they could implement similar measures simultaneously during a market-wide crisis, reducing the credibility of these assumptions. Supervisors expect banks to demonstrate that management actions are practical, evidence-based and fully embedded within approved governance frameworks.
Although the exercise will not result in changes to banks’ Pillar 2 Guidance (P2G) or leverage ratio guidance, the ECB confirmed that qualitative weaknesses identified during the assessment could influence the governance component of the Supervisory Review and Evaluation Process (SREP) and may therefore affect future Pillar 2 Requirements (P2R). The findings will also shape ongoing supervisory dialogue with individual institutions.
The ECB’s conclusions extend beyond the 110 participating banks. Deloitte notes that the results establish a benchmark for the wider European banking sector, including institutions supervised by national authorities. Banks are expected to strengthen geopolitical scenario analysis, improve integration between capital and liquidity stress testing, enhance sector-level exposure data and incorporate operational and cyber risks more comprehensively into ICAAP and ILAAP frameworks ahead of future supervisory reviews.
As geopolitical uncertainty continues to influence financial markets, the ECB’s latest assessment signals a shift in supervisory expectations. Rather than focusing solely on capital resilience, regulators are increasingly assessing whether banks possess the analytical capabilities, governance structures and operational preparedness needed to manage a rapidly evolving geopolitical risk environment.
Source: Deloitte
